Image via Wikipedia
As a Broker-Manager with over 18 years experience, I would have to say that the one issue I deal with most often is earnest money disputes. The challenge with earnest money being released after a cancellation of escrow, is that the Escrow Company will not release the funds without mutual, written agreement by both parties. Many times after a cancellation of escrow, one or both parties are upset and disagree as to who should have the earnest money.
The purchase agreement may contain language stating the earnest money to be refunded to the buyer in the event they do not qualify for the loan.
Even the GLVAR Short Sale Addendum clearly states: "Buyer may cancel the Purchase Agreement for any reason and without penalty any time after 45, 60 or 90 days from Acceptance if Lender Approval has not been received. Upon Buyer's cancellation, Seller agrees to execute cancellation instructions with ESCROW HOLDER and return EMD to Buyer."
Another trend I am seeing recently: Listing agent/Seller counters the purchase agreement to remove the contingency for loan approval after a specific number of days or the earnest money to become non-refundable after the due diligence period. While I believe this to be a sound technique to support the seller and strengthen the transaction, it goes without saying that buyers should not enter an agreement to purchase a property if they are not 100% certain they want to purchase. And of course, they are 100% qualified and approved for financing.
Even though that language is clear, the specific circumstances in the transaction may lead the Seller to feel that the buyer did not act in good faith. Or conversely, the buyer may feel the seller did not perform to the contract specifications. There are always two sides to the story.
This contract language can ultimately support the buyer or seller in prevailing in a mediation or court action if there are no other issues.
One solution to consider is to negotiate and perhaps split the EM. Often times, this is the result in mediation or court action, if there are clearly equal points for both sides.
The following information is taken from a form we provide our clients at Realty ONE Group to explain Earnest Money disputes and the steps to take/ things you need to know:
1. Your earnest money deposit will be deposited with the Escrow Company or Title
Company handling your transaction. The escrow/title company is a neutral third party
that follows the buyer and seller’s joint escrow instructions.
2. Your agent and broker have no authority over the escrow/title company. Therefore,
neither your agent nor your broker has authority to direct the payment of the earnest
3. If your transaction is cancelled for some reason, your right to the earnest money will
depend on whether there was a default under the contract and if so, who is the party in
4. A default is defined as: The omission or failure to perform a legal or contractual duty;
failure to observe a promise or discharge an obligation.
5. Your contract contains several terms and obligations imposed upon each party (buyer and
seller) to the contract. When you do not perform the terms of your contract you may be
deemed in default.
6. Your contract contains a default provision that you should be familiar with because it
will dictate what happens in the even buyer or seller defaults under the contract. It also
mentions what will happen to the earnest money in the event of a default.
7. Neither the escrow company nor your agent has the authority to decide who defaulted
under the contract. Only a court of law can make that decision.
8. If a dispute arises regarding who is entitled to the earnest money, an escrow/title
company will usually hold the money until buyer and seller reach a mutual written
agreement or the escrow/title company is presented with a court order directing payment.
9. If, in your contract, you agreed to mediate, you must pursue mediation before the Greater
Las Vegas Association of REALTORS®. If mediation fails, you may then pursue a
court action. For more information and to download the Mediation Request form, visit: http://lasvegasrealtor.com/professionalstandards/
10. If mediation failed to settle the matter, or you have no obligation to mediate you may
pursue the other party in court (usually small claims if the earnest money is under $5,000).
11. Small Claims actions are under the jurisdiction of the Justice Court. You may obtain
forms and proper procedures by visiting their office on the second floor of the Clark
County Courthouse, 200 S. Third Street. To find out more information and get the filing
guidelines please visit the following website.
12. If the court hears the matter and concludes you are entitled to the earnest money, it will enter
a judgment in your favor. Then you can present that judgment to the escrow company, which
will honor it.
This is not legal advice. If you have any questions regarding your legal rights, you should
seek the advice of an attorney.
Realty ONE Group
Las Vegas, NV
Discover the power of business coaching – Book a Free 30-minute consultation with Jan